Minnesota banks should see continued growth, Minneapolis Fed says

Minnesota banks should see continuing improvement in their financial performance in 2013, though recent fast growth in lending activity may slow a bit.

The forecast and 2012 summary from the Federal Reserve Bank in Minneapolis, released Thursday, Feb. 21, says banks' profitability will improve slightly this year and bad loans will be less of a problem.

Even with the expected improvement, uncertainty about broader economic forces could temper any profit boost. "I don't think it's going to be huge. I think it'll be steady as we go," said Ron Feldman, senior vice president of the Minneapolis Federal Reserve.

Data released by the Federal Reserve show that Minnesota banks' loan growth continued its uptick last year, though it's still below the 20-year median.

Feldman referred to 2012 as typical for the state's banks, as they saw benefits from the improving economy. The report also included data from the other states in the Minneapolis Fed's region: Montana, the Dakotas, northern Wisconsin and the Upper Peninsula of Michigan.

Statewide, Minnesota banks' problem assets, or bad loans, have declined steadily since the worst of the recession in 2008 and 2009, and now stand near the 20-year median level.

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For banks in the Twin Cities, though, bad loans remain more of a problem, as they're still about 5 percentage points higher than the 20-year median. Feldman attributes that to metro-area banks holding more commercial real estate loans, a sector that's been slower to climb out of the historic lows of the recession.

The Federal Reserve's report looks at some 375 banks across the state, including 96 in the Twin Cities area.

Lending standards still are tight for first and second mortgages, Feldman said. While banks can make more money by chasing riskier loans, the Federal Reserve's bank examiners haven't seen a lot of that type of behavior, he said.

One challenge for banks, Feldman said, shows up in the net interest margin, which is the difference between interest income banks generate and the amount of interest they have to pay out to their lenders, or depositors.

Banks' net interest margin figures were down in 2012, and continue to be tight, as low interest rates give them less wiggle room to increase that margin, he said.

Even so, banks still managed to show an overall improvement in profitability in 2012. They did that, in part, by setting aside less money to cover expected losses, Feldman said. With the economy generally improving, banks are more optimistic than they were at the depths of the recession, and that's reflected in how they allocate their cash.

At Drake Bank in St. Paul, the quality of loans and lending strategies have contributed to an improvement in the return on average assets, said Richard Gobell, president and CEO of the community bank that does both commercial and consumer lending.

"There's a real sense of optimism in the industry, compared to where we were one year ago," Gobell said.

To improve Drake's net interest margin, the bank has been selective with the terms of its loans, he said, and has been careful about fixing interest rates for long periods of time. While residential mortgage loans remain competitive, and long-term fixed rates are the norm, loans to residential homebuilders include fees and have a shorter term than the mortgage loans that follow construction.

Twin Cities' area banks are also being more cautious about the number of multifamily housing projects they're involved in, the Fed's Feldman said. That portion of the housing market has been hot in recent years, as several rental projects have gone up in the Twin Cities, and many more are in the planning stages.

But Feldman expects that large projects like ones built recently in downtown Minneapolis and the city's Uptown neighborhood will become less common.